Bridgewater Associates: 16% In 2012, How All Weather Came To Be

Ray Dalio’s Bridgewater Associates only had a decent year in 2012. The return across the funds was around 4%, trailing the S&P 500 but the fund was stronger compared to other funds in 2012. The firm’s All Weather Strategy, however returned 16% for the year, beating the S&P 500, and most hedge funds.

A new release from the hedge fund details the origins of the firm’s All Weather strategy. It all started, according to Dalio, with the 1971 announcement, made by Richard Nixon, that the dollar would no longer be convertible into gold. On hearing that announcement, Dalio says “I learned not to let my experiences dominate my thinking, I could go beyond my experience to see how the machine works.”

All Weather, according to the article, is about breaking down the machine and studying its component parts, and seeing how they interact over time. Doing that allows for greater understanding of the markets, and bigger returns for investors.

The All Weather strategy was originally used for the assets held by Ray Dalio in trust. The objective was no matter how the overall market performed, the All Weather strategy would still show returns. In 2012, a bad year for hedge funds, the All Weather strategy still proved its worth.

The full story, too long to tell here, can be found on the hedge fund’s website. The strategy was developed, and refined over the years, by trial and error at Bridgewater Associates. The impact of new technology, particularly the release of Microsoft Excel in the 1980s, had an effect on the development of the firm’s trading strategy.

Bob Prince began playing with the technology when it was released. Prince studied the data from the 1970s inflation shocks, and German hyperinflation in the 1920s. The data made sense to Dalio, who quickly factored it into his decision-making process.

Technology was, of course, not the real impetus for the development of the All Weather strategy. The important factors were an understanding of how markets work in relation to inflation shocks and hedging investments against risks. Of course the fund doesn’t reveal any specifics, that would undermine their business but there are some clues pointing to what investors need to do to protect themselves from losses, and make appreciable gains.

Bridgewater Associates doesn’t think that the All Weather strategy is done yet. The strategy is still valuable today. The strategy was developed with the assumption that it is difficult to predict what will happen in the market in the future. It’s designed to perform no matter what happens in those markets.